June 6 2018 Market Update
As we head into summer, we are updating you on the current state of financial markets. In May, risk assets such as equities provided varying returns ranging from positive to negative results.
U.S. equities did very well and SPY (an ETF tracking the S&P 500 Index) was up 2.4% in May with the index closing the month at 2,705.27. The Russell 2000, an index comprised of smaller market capitalization companies, closed the month at 1,633.6, at the cusp of all-time highs, and IWM (an ETF tracking the Russell 2000 Index) was up approximately 6.15% in May. Alternatively, international equities did not do as well. The EFA (an ETF tracking the MSCI EAFE Index) was down approximately 1.9% and in emerging markets the EEM (an ETF tracking the MSCI Emerging Markets Index) was down approximately 2.60%.  At the same time, the yield on the 10-year Treasury hovered during May around 3%, reaching four-year highs at 3.12% during the month, before closing the month at 2.82%.  These results are consistent with overall confidence in the U.S. economy but worries remain about the global markets.
On the domestic front, we just concluded a very strong earning season for the second quarter. According to Factset, 78% of reporting companies had positive earnings per share and 77% reported positive sales. Year over year earnings growth was 24.6% – the highest rate since 2010 – albeit much of that growth was thanks to the tax cuts and is therefore not expected to continue in subsequent quarters. The forward P/E ratio of the S&P 500 Index is 16.4, with the 5-year average sitting at 16.2. The current market is not an expensive one based on historical measures and is now trading at about 5% below the January highs.
The Federal Reserve has said that it intends to continue raising interest rates. Naturally, by doing so, the Fed is signaling its confidence in the U.S. economy. Fed Fund Futures suggest that it’s almost a certainty that the Fed will lift its target on the Fed funds rate to 1.75% to 2% at the June 13th meeting, with an additional 1-2 rate hikes through the remainder of 2018. This is in addition to the single hike we had so far this year at the March meeting. The Fed is also in the midst of a quantitative tightening program which will reduce the Federal Reserve’s balance sheet by $420B in 2018 and by an additional $600B for 2019.
However, this rosy state of affairs in companies’ earnings is clouded by macroeconomic and geopolitical concerns. First and foremost, on the macroeconomic side, is the potential trade war, which has been capturing the attention of media outlets since President Trump levied tariffs on steel and aluminum imports back in March. Much of the conversation has turned to the potential of a trade war between China and the U.S. These are the two largest economies in the world, but they are far from being equal; the trade imbalance between the two economies was a gigantic $375B in 2017, with the U.S. being the debtor nation and China being the creditor nation. In an attempt to resolve the differences, the two countries have engaged in high-level conversations in the last few weeks, with Treasury Secretary Mnuchin and Commerce Secretary Ross traveling to China and a comparable Chinese delegation coming to the U.S. During May, we saw a flurry of headlines regarding these talks, with the general impression that so far there is no trade deal but an understanding on both sides that neither wants to let the situation deteriorate into a full-fledged trade war.
We continue to believe that there will be no trade war between China and the U.S., even if negative headlines continue to arise before this issue is finally resolved.
Besides the thorny trade issue, many other geopolitical issues attracted investors’ attention in May. We’d like to mention four of them: North Korea, Western Europe, North America, and Iran. The U.S./North Korea summit is scheduled for June 12th, after being scheduled, canceled and rescheduled. It is still not clear whether North Korean denuclearization is even on the table.
In Western Europe, we’ve seen political uncertainly in Spain, where the Conservative government led by Prime Minister Rajoy lost a no-confidence vote and a socialist government has just been formed under new Prime Minister Sanchez. In Italy, an anti-establishment government has been sworn in after an almost three months of a political impasse. In both cases, the new governments are committed to the European Union and to remaining in the Eurozone.
In North America, talks resumed in early May between Canada, Mexico, and the U.S. regarding a renegotiation of NAFTA, but have yet to bear fruit in the form of an agreement.
Finally, in the Middle East, the U.S. pulled out of the “nuclear deal” with Iran (formally known as JCPOA) leading to tensions in the region and higher prices for crude oil, which then fell dramatically by month end.
Amidst all these tensions, it is not a huge surprise that investors feel more confident with Dollar-denominated assets. The U.S. Dollar Index was bid up by 2.5% in May, causing the relative underperformance of international equities. However, we remain of the opinion that a diversified portfolio should include a mix of both domestic and international equities. Geopolitical concerns affected international equities in May and might similarly impact U.S. equities in the future. In our opinion, the world economy remains in a “global synchronized growth” phase despite the geopolitical concerns that we just mentioned and will continue down this same path absent a major political or a geopolitical shock (which we have not yet seen). We also think that the ups and downs that we have seen in financial markets in previous months are symptoms of the adjustment to a stronger U.S. economy that is in the latter stages of an expansion cycle, and a Central Bank that is actively normalizing interest rates in response to economic growth.
We encourage you to reach out to us and inform us of any changes to your financial goals and objectives. We want to make sure that the risk of your portfolio correctly matches your need and willingness to bear risk so that you can stay invested amidst the uncertainty inherent in financial markets. Please contact Judy, Beverlee or Drew at 323-866-0833 to schedule your mid-year review meeting.
We want to let you know that Jeff’s executive assistant, Marissa Brasko, has officially begun her maternity leave. We are very excited for Marissa and her husband, John, and wish them the best as they await the arrival of Baby Brasko. Any questions for Jeff can be directed to Judy Robles at our office number or at firstname.lastname@example.org.
Summer is in the air and we want to take this opportunity to wish all of our graduates congratulations on reaching this wonderful milestone. We hope that you never stop learning, exploring, growing and challenging yourself to be your best. We thank you again for your continued confidence.
Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.
Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.
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Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
SPY- ® S&P 500® ETF is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500® Index. The shares of the SPDR S&P 500 ETF represent ownership in the SPDR S&P 500 Trust, a unit investment trust. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
RUT- The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was developed with a base value of 135.00 as of December 31, 1986. The Russell 2000 is the most common benchmark for mutual funds that identify themselves as “small-cap.”
IWM- The iShares Russell 2000 Index Fund is an exchange-traded fund of US stocks that tracks the Russell 2000 index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
EFA- The iShares MSCI EAFE Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the European, Australasian, and Far Eastern markets, as measured by the MSCI EAFE Index (“the Index”). The Index has been developed by MSCI Inc. as an equity benchmark for international stock performance. It is a capitalization-weighted index that aims to capture 85% of the (publicly available) total market capitalization. Component companies are adjusted for available float and must meet objective criteria for inclusion to the Index, taking into consideration unavailable strategic shareholdings and limitations to foreign ownership. MSCI reviews its indexes quarterly.
EEM- The iShares MSCI Emerging Markets ETF seeks to track the investment results of an index composed of large- and mid-capitalization emerging market equities.
TNX – The CBOE 10-Year Treasury Note (TNX) is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note. The notes are usually auctioned every three months following the refunding cycle: February, May, August and November. The expiration period of these notes is three near-term months plus three additional months from the March quarterly cycle. The aggregate position and exercise limits are 25,000 contracts on the same side of the market.
US Dollar Index® Futures- The ICE U.S. Dollar Index (USDX) futures contract is a leading benchmark for the international value of the US dollar and the world’s most widely-recognized traded currency index. In a single transaction the USDX enables market participants to monitor moves in the value of the US dollar relative to a basket of world currencies, as well as hedge their portfolios against the risk of a move in the dollar. US Dollar Index futures are traded for 21 hours a day on the ICE platform.
 The Forward Price to Earnings (P/E) Ratio is similar to the price to earnings ratio. While a regular P/E ratio is a current stock price over its earnings per share, a forward P/E ratio is a current stock’s price over its “predicted” earnings per share.
 http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html; obtained on 6/4